Cars.com and Carvana Stock Facing Weaker Consumer Sentiment

Key Points

• Cars.com and Carvana delivered two distinctly different earnings reports that say more about each company's business model than its status as an investment. 
• The latest reading on consumer sentiment was weaker than expected, throwing yet another curveball at the market. 
• While both stocks present concerns, analysts give CARS stock more upside, but a rate cut or two could change that.  

Cars.com Inc. NYSE: CARS and Carvana Co. NYSE: CVNA are two different ways to play the retail automotive market. Both companies are attempting to modernize and digitize the car buying experience. However, the two automotive stocks are behaving very differently.  

Despite showing year-over-year declines in revenue, CVNA stock is up 739% in the last 12 months. The catalyst is a pause and likely end to the Federal Reserve's interest rate hiking campaign. Another is the company's YOY improvement in earnings per share. Carvana is still not profitable, but the losses are narrowing.  

Cars.com has been beating on revenue and earnings YOY, but the stock is down 6.25% in the last 12 months, with most of those losses happening since early July 2023, when CARS stock hit a four-year high of $22.84. 

What Did Earnings Say?  

Both companies reported earnings on February 22, 2024. For Cars.com, the report was more of the same. It reported higher YOY revenue but missed earnings per share (EPS) by three cents. The company is profitable and forecasts 28% earnings growth in the next 12 months. For 2024, Cars.com projects 6%-8% revenue growth with 28%-30% growth in adjusted EBITDA margins.   

Carvana reported lower-than-expected earnings, continuing a trend in place for several quarters. The company also missed EPS guidance by three cents per share. Carvana is not projected to be profitable next year, although it forecasts narrower losses. The company also issued tepid forward guidance stating only that it expected revenue and earnings to improve compared to 2023.  

But what is the significance of these reports, if any, to investors? 

They Only Sound the Same 

Both Cars.com and Carvana are part of the Retail/Wholesale sector, but that's where the similarities diverge. Carvana is more of a dealership – albeit in the digital sense. By contrast, Cars.com is more of a matchmaker that connects buyers with sellers.  

This is an important distinction for investors. Both companies are considered to be in the retail/wholesale sector. But whereas Carvana is categorized in the auto dealer industry, Cars.com (as the name implies) is classified under the category of data processing and preparation.  

That means that analysts and investors evaluate the stock in different ways. Cars.com is more of a social media stock with metrics such as Average Monthly Unique Visitors (UVs), Traffic (as calculated by Visits) and Monthly Average Revenue Per Dealer (ARPD).  

By contrast, Carvana is about buying and selling cars. The transactional nature of the site is very consumer-focused and cuts out the dealer.  

The Consumer is Weakening...Maybe? 

On February 27, 2024, five days after the companies reported earnings, the latest Conference Board reading on consumer confidence was released. It showed its first decline after three months of improving data.  

Furthermore, a specific part of the report that measures America's short-term expectations for income, business, and the job market fell to 79.8. Not only was that below the 81.5 reading in January, but historically, any reading under 80 signals an upcoming recession.  

Should You Buy One, Both or Neither? 

Based on what you know about each company, you would expect analysts to walk back from their expectations for CVNA stock. Yet, after the earnings report, CVNA stock is up 43% on bullish analyst sentiment.

Having said that, the Carvana analyst ratings on MarketBeat have a consensus rating of Reduce and a consensus price target of $41.53, which is over 49% lower than the current price. Notably, the highest price target from JMP Securities is $80, just a tick below the stock's closing price of $81.95 on February 27, 2024. 

Cars.com has a consensus Moderate Buy rating with a price target of $24, 29% higher than the stock's closing price of $18.47 on February 27, 2024.  

However, interest rates will likely inform your decision to take a position on either stock. If the Federal Reserve cuts interest rates, it may spur buying activity by bringing some consumers back into the market.